Florida Medicare Carrier Raises Kickback Issues

Pathology laboratory practices singled out as possible violations of anti-kickback laws

CEO SUMMARY: When Florida’s Medicare carrier published a notice which defined certain pathology practices to be possible violations of anti-kickback laws, it created uncertainty for labs. DIANON took immediate steps to insure compliance while seeking clarification from regulators on this issue.

Developments in Florida signal that regulators may be preparing to target laboratories for more aggressive enforcement of anti-kickback and inducement laws, possibly on a national basis.

Last fall the Florida Medicare carrier published an advisory on this issue. (The full text is reproduced below.) The carrier’s action was apparently triggered by complaints from individuals in the state about the business practices of laboratories.

A careful reading of the carrier’s advisory indicates that the carrier was made aware of certain laboratory practices. After discussing these practices with the Medicare Fraud Branch, the carrier “determined that the distribution of such materials clearly falls under the definition of ‘kickback,’ and is therefore illegal.” The carrier noted that “to persuade prospective referring physicians to send specimens to certain pathology laboratories… representatives of these labs are giving away certain medical items, such as prostate needles to urologists and cautery instruments to gastrointestinal specialists.”

The explicit mention of pathology laboratories, as well as specific collection supplies such as prostate needles and cautery instruments, caught the attention of laboratories serving Florida. DIANON Systems, a national provider of pathology services, reacted quickly to the carrier’s determination.

“When this surfaced last November, we responded with two actions,” stated Kevin Johnson, President and CEO at DIANON. “First, in December we informed our physician clients in Florida of the Medicare carrier’s ruling and we stopped providing the collection supplies affected by this Medicare advisory.

“Second, we wrote the Office of the Inspector General (OIG) and requested clarification from them on this specific issue,” explained Johnson. “Our attorneys tell us that supplies used solely for the collection and transport of specimens are clearly within the law. We do not know why the Medicare carrier in Florida interprets this differently.

“From what we can determine, it appears this was initiated at the state level. To our knowledge, there was no input from the federal level. That is why we wrote the OIG and asked for their ruling on this issue.”

Since DIANON sent their letter to the OIG in December, they have heard nothing. “While waiting for the OIG opinion, we considered it prudent to cease the practice in question until the OIG provides definitive guidance not only in Florida, but nationwide,” said Johnson. “We made that decision in February. In March we sent letters to all our physician clients throughout the United States announcing this decision.” (The full text of the letter is reproduced below.)

DIANON’s legal department also provided other laboratories operating in Florida with a copy of the Florida Medicare carrier’s interpretation of anti-kickback statues. Should the Florida carrier’s determination be affirmed by federal regulators, it will have a significant impact on the business practices of laboratories.

Unintentional Reassessment

It is the opinion of THE DARK REPORT that the action by the Florida Medicare carrier may have unintentionally triggered a reassessment by federal prosecutors of how to define anti-kickback and inducement statutes as they apply to current laboratory industry business practices.

Preliminary investigation by THE DARK REPORT indicates that competing physicians may have been the ones who brought the collection supply issue to the attention of the Florida carrier. However, once the Florida carrier published their determination that providing certain collection supplies violated anti-kickback statutes, then the “law of unintended consequences” may have taken effect.

Currently the OIG has a more skeptical attitude toward the clincal laboratory industry than was true seven years ago. The OIG also has a sophisticated understanding of laboratory business practices, gained through almost five years of intense investigations.

It would be reasonable to assume that the actions of the Florida carrier, and a laboratory’s request for a binding opinion, are causing federal regulators to determine whether they want to “redefine” certain lab- oratory business practices as kick- backs or inducements.

THE DARK REPORT noted in earlier issues that the federal settlement with SmithKline Beecham Clinical Laboratories for $325 million included allegations of inducement between the laboratory and physician clients. That could be considered both a precedent and current evidence of how federal prosecutors view enforcement of kickback and inducement laws affecting laboratory practices.

It would be reasonable to assume that federal regulators already consider many laboratory business practices to be borderline violations of inducement and kickback laws. Regulators would base this on their 1997 perspective, while looking to enforce this reinterpretation of the law on a retrospective basis.

The OIG’s lengthy silence without a ruling may be related to the newly- announced policy of providing advisory letters. But three factors make THE DARK REPORT believe that federal regulators might be reinterpreting how laboratories comply with inducement and anti-kick- back statutes.

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Intimate Understanding

First, regulators now have an intimate understanding about laboratory operations. Second, they have confidence, gained from successful Medicare fraud settlements with laboratories. Third, if federal investigators weigh the financial and publicity benefits of changing how anti-kickback and inducement statues are interpreted and enforced, they might decide that they have a financial and public relations bonanza. It would be a low-risk, high-return strategy.

It is speculative to assume that federal regulators may indeed choose this course of action. However, it has been 90 days since DIANON requested an opinion from the OIG. Since no reply is forthcoming, that is evidence that serious debate could be taking place among regulators.

In the meantime, DIANON should be recognized for taking positive steps to comply with the carrier’s interpretation while seeking definitive guidance from the OIG. Although these steps placed the company at a competitive disadvantage, the long-term interests of DIANON’s stockholders, employees, physicians and employees were well served by this prudent action.

California Labs Play With Fire On Issue Of Inducements

Contrast DIANON’s response to a regulatory ruling on anti-kickback practices with those of California laboratories responding to state inducement laws.

DIANON, although not in agreement with the carrier’s ruling, immediately wrote the OIG requesting clarification. Meanwhile the company ceased the practices in question, despite possible competitive disadvantages. This is good corporate citizenship. It is also smart compliance.

In California, laboratories do not dispute that state law prohibits inducements, such as the placement of phlebotomists in a physician’s office. (See TDR, July 1, 1996.) Yet, even after the California Clinical Laboratory Association sent out copies of the legislative council’s legal opinion and a Department of Health Services letter declaring the practice illegal, no major laboratory has ceased the practice.

This brings about an interesting question: whenever the first state prosecution singles out a California laboratory for civil or criminal action, what defense can that laboratory offer? It is certainly on public record that they were given notice that the practice violated the law.

California laboratory executives should expect no sympathy or mercy whenever state prosecutors finally decide to enforce an outstanding law. At that time they may wish they had followed DIANON’s conservative example of regulatory compliance.


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